Natural Gas Spotlight | Mike Follett | 11-7-19 | Leveraging Capital with Futures
So. If. You want to learn more about how, natural, gas futures, work, well, you've, come to the right spot because. That's one of the things we'll highlight today in our, leveraging, capital with futures, webcasts, so, that and more on the other side of our introduction. Real. You. Welcome. Everybody this is Mike Follet glad you could join me today and, as. The slide says and, as, I just mentioned, this is leveraging capital with futures, again. If you wanted to give a follow on Twitter to not just me but any of the coaches you. Can find us on Twitter at and, the, first letter of the first name followed, by the last name underscore TD, a so in my case M Follet. Fol. Le TT underscore, TD a and, also. Like, and subscribe to the channel it's an easy way to keep track of these videos in the future if you want to go back and listen to archives and, as. We get started though let, me just remind, you about some important disclosures, futures. And futures option trading, well that, carries, some risk, so just make sure you understand. The risk disclosures. And that. You've got the appropriate Peru approval, and certainly. That you feel like these are suitable products. In your investing. We. Will use a paper money account, today but, remember is, you're using paper money if. You're just wildly. Successful. Results. In a live account might vary because market, conditions, can certainly change options. Are not suitable for all investors there, are risks, involved with trading options in general that could expose an investor, to rapid, and substantial. Losses so. Just make sure you understand, those disclosures as well spread. Straddles, other multi leg strategies, can entail substantial. Transaction, costs, and also, trades. Involving minimum. Profit, bubala, trades involving minimum, potential, benefit, can, be more impacted, by fees. And yes commissions are a thing of the past which, is super. Nice but when you're dealing with products like futures and also. Options, there are some fees involved so just be aware of that and you're seeing an example of these on the page probability. Analysis, is not a guaranteed, outcome. Also. When you're taking a look at historical. Data, you know back-testing, in other words what's. Happened in the past is not guaranteed what's going to happen in the future no, soliciting, no recording and no taking pictures no, part of this presentation should be rebroadcast, without, the written consent of, TD Ameritrade, and there's. A quick look at the Greeks all, the way from Delta down to theta. And you know one thing I wanted to start with just so that I don't forget, I usually like to kind of weave these comments, in throughout the session but, many. Of you especially just, on the heels of Vegas, we. Had that large investor, conference in Vegas it was a ton of fun if, you get a chance to go to one of those I would highly suggest it, and it's awesome because it's a free.
It's. A free conference, so, it's pretty cool but. Anyhow I got a lot of questions about other in-person. Events. That, somebody could have access, to if they wanted. If. You recall we do workshops where, a, coach, will head out to a particular. Location. And actually. Instruct, a 2-day in-person, workshop, and, certainly. You can attend those they are free bring. Your laptop, there's, power there's internet, provided, and basically. For two days just kind of immerse yourself, in the content, and those. Are a terrific experience, anyway, or also because, you get that community, type of feel it's. A great opportunity to get hands-on experience you. Know kind of follow along click the buttons on your own computer that, the instructors, showing from. The stage so. Anyhow these are in-person workshops. And you, can find those. You can find a schedule for those in-person workshops, just to, see if anything's coming to your neck of the woods under, the education. Tab and then. Right at the very top not, webcasts. I'm just so used to clicking webcasts. But since I clicked webcasts, that's how you can identify. Other. Webcasts that, might suit your interest outside of this one but. Also there's a link at the top of the page here I'll tell you what let, me go ahead and use my screen, brush to underline, that right there in-person, events just. Click on that and that'll. Show you the schedule of the upcoming in-person. Events, so you can see that there is a, fundamentals. Workshop. That'll be in Orlando this. Weekend, I'll tell you what we should be broadcasting, this webcast, from Orlando, actually. The, weather's pretty nice here so I, don't mind Utah, today because I think we're in about the 60s, with clear blue skies out there today but normally. I prefer Orlando. Weather, this time of year any. Following. That though we'll have a technical, analysis, and, options. Workshop, to, day events first day I'll be technical, analysis, the next day will be options. More. Of an introductory, option, option, segment that'll be next week, in, Illinois. Just, outside of Chicago there, in Northbrook it's great location, I've been there many times myself and, also. If you're in the New York area. I'll be in New York teaching. Advanced, concepts, at the downtown. Marriott I, understand. That parking, is really easy to find it's not a pro so just come on down to lower Manhattan and, that'll. Be on. Just. The week before Thanksgiving basically. November, 22nd. And 23rd, but, you can access the, upcoming, schedule and also, just register. For these classes by clicking. Learning, more and you'll. See the registration process, right, below the day, one and the day to agenda, there okay but I wanted to get at that taken. Care of because. You. Know it's just something that I am talked about for a while in this class and also. I had a lot of questions about how to find those classes, at at. The vegas conference, okay, so apparently. I didn't update our agenda, in the scratchpad over, here I. Think. I got distracted was, suddenly setting up the YouTube no, surprise there but just to let you know the things that we're going to cover today I'm, going to take just a couple of minutes to review. One. Of the trades that we put in yesterday's. Class if you remember, we talked a lot about butterflies. Yesterday. In. Our probability. Based options session, and you.
Know Sometimes. You're, the butterfly, that's flying. Around and things, seem to be good but sometimes you're the butterfly that smashes, into the windshield and that's, kind of what's happening to the trade that we placed yesterday, so, I want to do a quick review on. Yesterday's. Example. And. Then. We'll. Jump into in. Particular, NAT gas. Futures. And. We'll kind of break that down one, thing that I've noticed in, teaching, this class, I, you. Know because using, futures it's so, much different, than using, stocks, that. Many people are familiar with it makes sense to kind of spotlight the different, futures, that are available, out, there and. Address. Them uniquely. For their contract. Specifications. So, that if somebody tries to use these products, they, really kind of understand, the. Way that contract, works so what kind of spot like natural gas and we'll do a paper trade example, on natural, gas futures as well in addition, to this, we. Do have remember. A few weeks ago we put on a micro. Future. Hedge. In. This, particular paper money portfolio, since. Then the market is actually broken out to the upside so, wanted to talk about some techniques that some traders might use if they're trying to make an adjustment to, their hedge in light, of maybe changing opinions, about what the market is doing right the hedge is actually losing money, so. I want to talk about some of the adjustments, that some traders might do in terms, of adjusting. Their approach to that hedge if, they're if they wanted to make an adjustment to the hedge that is so. Micro. Adjustment. And. That. Will be referring. To the hedge. Position in this portfolio so we do have a lot of things to cover and let's, get right to it I'm going to jump over to the monitor. Page on the, monitor page this, is where we can find our butterfly. Example, that we did yesterday if, you recall, it was on Baidu and let, me see if I can find Baidu in that mix this, is alphabetized oh yeah there it is right there so, like I said sometimes, you're the butterfly, that's alive, and well and, sometimes you're the butterfly that gets squashed across the windshield and that's, essentially, what's happening, to this trade, today. Do one of those iron butterflies, technically. But. Still sort of the same structure, but, with it being an Iron Butterfly it actually allows us to take in a credit, rather than paying a debit when we initially, get into that trade. But. Nevertheless we took in a credit here of four. Dollars and 81 cents and, when you do that on this type of trade the way you make money is to buy, out of this trade, for less than what you sold into it for right, so we sold into it for 481 and right, now it's worth six dollars and 93, cents so the, trades actually gone up in value which, is not a good thing for us but. I figured it would be worth talking, about this number, one the reason why this is not working is, because the. Stock had a super. Duper positive, response to earnings it, is up thirteen, dollars, right now Baidu, is and the expectation. Talking about the market maker move which. Is sort, of the way we approached structuring. That trade was kind, of around that market maker move it, was about seven, dollars up. Or down seven, dollars I mean in the stock and it. Looks like the stock about doubled, that market maker move so that'll happen right just a giant move up with the stock and to take a look at a chart on this on. Baidu. To, kind of put that into perspective as, well. Boom. Explosion. To the upside, you, know and since we're looking at this for a second some. Traders, will. Actually, you, know even though that's a disappointing, outcome some. Traders will actually take, note of moves, like this in response, to a positive, earnings announcement, some, traders might consider, that sort. Of a breakaway situation. Of, course you, know nobody knows, the future but. If you kind, of take a look at the past, here, and. Again what's happened in the past is not a guarantee of what's gonna happen in the future but, when. The stock gapped down in, response to an earnings announcement, a number of months ago that, really kind of set the stock on a trail to going down and sideways. For, a number of months and so, that was sort of like a a break, away type. Of gap but in this case to the downside, some.
Traders Will observe these. Breakaway. Gaps. As, maybe. A signal. That, the stock is ready to make, a move higher or move into a sort of different pattern, here and it did sort of build a base in here where 100. Became a pretty strong level of support, down at these lows, resistance. Maybe just above 110, right, now it's above 120. But, again some traders will take note of that as maybe a breakout, signal, and look, for an opportunity to trade, something to the upside that's bullish you, know something as simple as buying, stock. You. Know in for. Example if someone we're thinking you, know this now just turned, from a butterfly that just got squashed into, a stock investment. Granted. The stock has had a giant move higher already, you, know one might not help but think hey the stock could come back down or, it could go up but it's sort, of overbought in the near term some, traders might actually you, know let's say they thought I'm okay with buying 300, shares of stock some, traders might decide to you know buy or start with a small, position now maybe. 100, shares or so and then, place a limit, order to, buy into additional, shares if the stock has a pull back another. Way to think of doing that is to potentially, you know again if someone thought they could have 300, shares or whatever their number is they. Could always start with buying a hundred shares of stock and then maybe selling a put option at. A lower strike price that. Would generate some income or generate some premium and it. Would put them under obligation, to buy into the stock and I know I came into this thinking about that butterfly, example, but I didn't want to make mention of what's going on with the price action here and so, I'll tell you what what I'll do is just put in an example trade here and, let's say our goal is to buy up. To 300. Shares of stock what. I'm gonna do is actually I. Scale. Into this right rather than buying it all right now so I mean it looks bullish, but certainly. Overbought it might have a pullback but maybe let's, just start with a hundred shares for. Illustrative, purposes and, then, maybe we'll. Add to, this on a pullback so I'm gonna create and just, so you know what I'm doing here I'm hitting blast all after, I created, that initial order, to buy a hundred shares and what. I'll do is actually. Create. A, duplicate. Order so I've got an order to buy 200, shares but. On the second. Set. Why don't we just put an inner order to maybe buy that just above the breakout point so. That if the stock comes down. We'll buy into. It on a pullback and you. Know it's always a question where, would you place your limit order if you're gonna do something like this I'll, tell you what let's just go ahead and choose these old highs, right. In here if I can get, my pointer right across the top of those let's. Say that those old highs are at 113, let's, place an order to buy another, 100 shares of this that, 113. So. We'll bring that order back up on the page here on. The second, order we'll choose. 1. 1 3 now this is certainly not guaranteed. To be filled right, because, the market would have to come down about 7 points in order for this to get filled but, we'll go ahead and place that GTC. Because, you know maybe it's not likely to happen today but, if we leave that good tale cancel order in there it'll, be something that's on the books so that we don't have to watch it like a hawk, and if the stock does come down 113. It'll, buy in and, certainly. Another thing that could be done and. Let's. Go ahead and just hit Send on this if. The goal was to buy you, know up to 300. Shares, of stock, certainly. A trader, could come in here and maybe sell a put option, what, would an 8 day put option look like which. Would put them under obligation. To buy into stock shares. And. I'll tell you what let's just go with something. Out of the money here we'll go just less than 30 deltas choose, this 117. Put and we'll. Place in order to sell one of those it looks like those are going for about 120. Right. But this would put the trader under obligation, to buy in two shares of stock at 117.
If. The stock is below, 117, on expiration. Then. The put would be assigned, and they just buy in by, doing nothing automatic. Assignment there but, if the stock stays above 117. I you, know the put option could expire worthless and, the, credit, from selling the put could be obtained but. Let's, just go ahead and hit, confirm, and send on that, all. Right so we got a puts old obligated. To buy 100, shares at, 117. Plus bringing in about a dollar 23 credit and we. Do have. Working. Orders. Here, our. Original, order, to buy it actually hasn't filled yet let me go ahead and hit cancel and replace on that initial, order to buy in let, me unlock that, we'll, just put. In a market order because it's moving pretty fast here, but buy, so, we own 100, shares at 120, 106, we've, got the right to buy a hundred shares at 117. I bringing. In over $1 worth of credit and then, as an outcome here we also have one remaining, order, to buy in at. 113. Limit, order good tale cancel but that's just an example of how you. Know rather than you know just getting into everything, all at the same time someone. Might decide to layer into, an idea right, come up with the maximum, allocation. They're willing to have right. In this case I just use 300, as an example place. In, place, a structure that allows that traitor especially, if they thought the stock could make a pullback here but. A structure, that would allow them to maybe buy in at lower prices but if the market keeps going higher at least some things are making, some money okay, anyhow that's just an idea but. Anyhow. In this paper money account, let's just jump back to the monitor page the. Bullishness, I'm, on the monitor page let's go to the position statement section, of the monitor page but. That's you, know the bullishness of the stock is what's really hammering, this, Iron Butterfly that's, in here now one thing I'm going to mention with this Iron Butterfly. Certainly. A trader, might decide to you, know attempt, to buy this back, before, the expiration, date if they wanted to but. Just the way this is going to work. Let. Me just grab my highlighter. Here. We've. Got a short, call spread, that, seven dollars wide and it's, completely, in the money right now right. The 114. Strike price is the upper, strike and, if the market believes that. We're gonna be above 114. On expiration, date and right now we're at 121. Or whatever the price of the stock is right so there's a pretty good chance at the mind of the market right now that, spread, is going to become worth essentially. Seven bucks right what's, the price of that spread right now six. Dollars and ninety three cents, if, you're thinking about what you know the damage that could still be done really.
There's Not a lot, of risk, remaining. In this spread so, for the next day anyway we, could just leave this on here right, not even remove it necessarily because it can't really hurt us anymore and if, the stock did have a giant pullback that, trade that's a loser right now could actually serve, to sort of defend this, stock position, that we're creating now it doesn't defend it forever right it's just for a one-day situation. And the stock frankly, could go all the way back down to 114. And this, could still take a maximum loss but hopefully that makes sense on the exit I'm just gonna leave this in there because it can't really hurt us any more but, some traders might choose to buy this back, just to remove, it from their sight and if, they're buying back the. Call spread, and well. If they're buying back the entire butterfly, is a set one. Thing that could be difficult in terms of getting filled is this. Additional, long option, on the puts it's not additional, but it's these puts that, are very far out of the money I'm curious. As to whether, or not those puts actually, have a bid because, if they don't have a put you cannot, exit, that as a spread, yeah. And there's no bid here okay, but that's one point two points I wanted to call out of this it's, near max loss anyway, so we'll, just leave it but. Number two if someone, we're trying to close out of the. Iron butterfly here you, couldn't, actually do, that as an iron butterfly, because you, need to sell. Sorry. Just click the wrong thing. My. Bad. All. Right but you'd need to sell this. Long option right here and it, has no bid on it right, and as long as that has no bid, you know, the, bid represents, what somebody's willing to buy that option for there's, no interest in buying you need to sell it so the solution, would be to either a let. This put spread expire worthless or be just. Buy back that short put okay. And in fact here's. What I'll do, I'm just gonna go to the short. Clip that's in there short. Put at the. Whatever. Strike price that was and I'm just gonna place an order, to buy, back that, short putt for three cents right there, it's gonna be the 107-foot, remember, right click on that set of options and in the menu just find what you want to do so, just place in order to buy back the short put by itself hit confirm and send, alright there you go so, by do you, know big move higher some other names, are moving up to Ralph.
Lauren Had. A really, positive response to, their earning stock had a ginormous. Gap up it, looks like it's kind of been neutral, here with. Some volatility throughout, the day but it's not too far from where it actually opened, also. Note FC X this. Stock is having, a pretty strong move up today now, this is not in response to an earnings announcement. Just some, of these commodities, stocks in, general are, actually. Doing pretty well and, some, traders might view that as. You. Know kind of the wheels of Industry kind of cranking up for bullishness there. But. Anyhow i, FCX. Having, a nice move higher and, Qualcomm. QC, om just, another name that had a very positive response, to an earnings announcement, and they, are breaking into new highs today as well certainly, we'll have to see if the stock actually holds, those highs but drawn. A trendline on this it, did, actually. Break. All the way through the previous high so a new high here made. Today at 90 to 50 so there's some things that are moving to the upside. Kind, of an interesting market that's going on the S&P 500, right, now is up 17. Points. The. Russell 2000, is up 8 and the, dow jones is, up nearly 300. So bullishness, happening. Out there all. Right so now let's, move on because we need to talk natural, gas and this is a futures class by. The way so, this is kind of the primary point of our futures class, natural gas now. I'm gonna jump over to the trade page for just one second, and we'll type the ticker symbol for, natural gas here be. /ng. Is the, symbol for natural gas and just as a quick. Reminder for, anybody. Who's just, starting getting, involved with futures, just, this, symbol, field here is quite. Useful in, terms. Of giving you a way to understand, what futures. Products, might be available, if. You hit the drop down box you've. Actually got a submenu, here, and a, tab within the submenu. Futures. This, is going to give you a line up of some of the significant. Futures that you could actually quote, natural. Gas being one, of those ok so just remember you, have the availability of this menu here for futures, now, I know the symbol for natural gas already, so, just, gonna type it right into the screen there so. /ng. Now, if someone we're looking at the price of the underlying future. I'm just gonna go ahead and left click on the ask price here. You. Know you look at this thing and I remember, the. First time I looked at natural gas and this one really confused. Me because when, you look at that price it, seems kind, of out of context. Doesn't it I mean you've got something, here that's going for two. Dollars and 79 cents, okay, so it's a penny stock right. It's. Not a penny stock there's, a certain degree of leverage, that the. Price of this. Represents. Right if, this moves one, point it's, going to be a lot more profit. And loss right if it moves 10 cents, it's going to be a lot more profit, and loss that you then what you might expect, because, what, this futures, represents.
Is Basically a package. Of natural, gas right a certain amount of natural, gas the actual commodity, and so. If you can visualize that. You. Know it's it's not the price of one Big Mac it's, a bunch of Big Macs together. So we'll read the price of 50000 Big Macs all packaged. Together, but. We're just going to show you the price of one of those Big Macs and this, conscious, this is a terrible analogy I know but, this contract, is going to move based. On the value of the 50000. Big Macs that are in the contract now I'm spacing, at the moment for. How much or, how many BTUs. Of. Natural. Gas this actually controls. I cannot, remember I think something like 40,000. BTUs. Anyhow, don't, worry about that because I forgot none I want to give you the wrong information but. Nevertheless. I'm, still going to show you what, it would mean if, the, price of this started, moving around right, if the price of this actually changed, and just, a quick way to understand. You. Know the influence, of a 1-point move of. This natural gas future, just. Jump over to the analyze, tab with. The future in tow here and, click. On the fundamentals. Page. The. Fundamentals, page just within the last month or so has. Become quite useful, in terms of understanding about. How, futures contracts, work just. Right here below the overview, page. What. You'll have are the specifications. For. The underlying. Future, contract, and, I'll just make sure everybody understands, what this means right in particular, the first one here is the multiplier. The. Multiplier, is. 10,000. So. What that means is that any, movement. You see in that underlying, future, needs. To be multiplied. By 10,000. Okay, so, one. Way to think of this is if we bought this natural, gas future, and it went to zero it. Wouldn't be losing you. Know two dollars and seventy eight pennies. You know out of our pocket, or you. Know multiply that by a hundred is, if you are buying 100 shares of stock two hundred and seventy eight dollars, you'd. Need to take that 278.
And Multiply, that by, 10,000. So, what's, 278. By 10,000. Multiplied by 10,000. Or. Excuse, me 2.78. Cents, multiplied. By 10,000, to, spot seven, eight times. 10,000. Equals what, and. I. Did that wrong to, point. Eight times. 10,000. Equals. $27,000. That if someone bought one of those futures and it went to zero that they could theoretically lose. Right but the reason I'm showing you that is because. That's the value of the natural gas that's packaged, into this contract, right now and, so if the, future, starts moving, around a, one-point. Move in that future so, going from two dollars and seventy eight cents to three dollars and seventy eight cents, that's, ten, thousand. Dollars if this, moved 20. Cents for example, so, 0.2. Times. 10,000. Would. Be what two. Thousand, dollars so, just be aware right. This. Has leverage, the, name of this class is called leveraging, capital with future, that's, the that's, sort of the first inkling, about, the leverage that's, going on here that's, the way they package this together now, the minimum, increment. Right the minimum, value, that this future could trade in so if somebody bought it and it moved one. Price. Tick in their, favour or in, their favor how, much is that one tick the, minimum, value the minimum increment, that these could trade in. Is. Point. Zero. Zero one. Okay. And so that's why you've got that third space. Out here when. You're talking about the price of this the minimum increment, is this this could go from 278. Five. To two seventy eight six like it just did right there now, each of those, I, guess that would be what one, whatever. Would, be equivalent to. $10,000, so just be aware that's. The leverage you're dealing with and really you know that doesn't even necessarily indicate, the leverage that's going on here in order, to understand, the leverage, that someone has they, really need to figure. Out what the margin requirement, would be to buy one of these right, or, sell short one of these futures, contracts, so. That's where I'm going to go back to the tab. That we had before just, click that. Drop down arrow go to futures, and find. The ng in this menu and there, you can see the tick size and the tick value as well but, notice the initial margin is two. Thousand. Six, hundred ninety five dollars so. With, an investment, of two basically. $2,700. Just shy of $2,700. The, investor, is taking, control of. Twenty. Seven thousand, dollars notional. Of this, underlying. Of natural-gas.
Basically. Is that sort of make sense so, that leverage, is you. Know it tended. To one leverage essentially. A lot of leverage with, those futures. Okay. And, if it moved 40 cents for example, or did. We do it on 40 cents I think we did anyhow, that could be roughly, equivalent to the amount of margin that's in place here okay. So trying, to help you understand some of those contract, specifications. And just, note this as well some. Traders just, because of the amount of leverage and due. To the fact that. You. Know in order to protect an individual, self you know if this if they put in a trade and it started going against, them you, know you, buy it and basically you sell it as a way to get out right or maybe. Somebody uses, a stop-loss to try to help control, their risk some. Traders feel like maybe that's too much risk just, leaving the exits. Especially, to control that risk up to certain orders, so. If that's how, you feel that that's just too much risk but you find, a product like this interesting. One, thing that some traders will do is they'll actually shift over to the options, market and this, is where it gets weird because, there. Is an options, market that's available on this product so, the, natural-gas underlying. Future, is a derivative, of natural, gas and you. Can trade options, which are a derivative of that natural, gas future. Okay. Now these futures. Themselves. They do have different, expiration. Dates right these contracts, up here have different expirations. So, be aware these, options, also have their own expiration. Dates and based. On the expiration, date of the. Option it might, have the. Underlying future. In a, different expiration. As well but it's really kind of easy to keep track of that what, you can do is just kind of note the ticker symbol here, for the options, that you're looking at so ng z19, see, how that lines up with the ng, z-19, right there and then, if we went out 49, days you, got the ng, F 20. Well, that kind of lines up with that ng, F contract, right there so it's really nice courtesy.
You, Know whenever you're trading options here just pay attention to that ticker symbol, and you, know which underlying, future, that option lines up with okay. But now let's. Take a look at maybe the options, market and as we shift over to the options, market let's. Looks, actually before we do that let's. Take a look at a chart on the, underlying natural gas future, and take a look at some of those characteristics, and see. If maybe. There's anything there that might, drive, may, be some sort of an assumption I mean if somebody's going to trade an option they got you know it makes sense to have an assumption in place about where this thing can go and, one. Thing that's happened in the past week here, on these. Futures. And. I'll actually zoom in on this for. A moment, here just seeing see that a little bit better, but. If you pay attention to, kind, of what's going on there. In that chart. There. Has been a. Pretty. Significant. Just trying to activate, my drawing tool there but we've, got a pretty significant, break out that just happened, there and I had two fingers, hitting. Right, there on the screen that's why I got two lines is really nothing specific, about that second line but. Just one then the past week or so and, a lot of this you know some people might ask the question well what drives. These natural, gas futures prices, why are they moving around the way they are you know why would we break out to the upside like. This well. Whenever. You're dealing with a product, that's derived, from commodities. Right or is packaging, commodities, together you, know you've gotten. Macroeconomics. That can come into play and micro, economic, situations. That can come into play and what. We're seeing here with this rally and natural gas it kind of coincides, with. A lot, of news around. You no more. Cold weather expected. Right, and that's something that can actually, create, a perception, of greater demand, for natural gas and, if there's perceived, greater demand for natural gas and, there's, only still, the same amount of natural gas that's available that's, definitely, going to move price and really that's sort of what's been the, the, motivation. According. To most individuals, this is kind of the thought is that, this. Worry. About, cold. Weather happening. Right isn't that weird right, maybe if you're used to trading stocks you know you look at the earnings announcement. You. Take a look at what, sales are expected to be next quarter you know how's the stock company's cash flow position how, are they doing in terms of their, product development all, those sorts of things very, much with a product like this it's. It's kind of a supply and demand. Scenario. Right and so it's how much production, is there for. Example if there's, a. Disruption. In, production, or delivery, of natural gas from the fields where they're getting it to basically the heads the well heads where. Utilities. Companies, can actually use that, in. Their utility you know those types of disruptions, could disrupt supply, and, that would be another reason why natural, gas could go higher but. It's sort of a different way to look at this and some traders like that right the some. Traders find more certainty, in thinking more about the. Supply and demand dynamics. More. Than you know just the you, know the fundamentals. Of an underlying company, and trying to figure out how the markets going to receive those fundamentals, some, traders actually like to interpret, these fundamentals. On these, commodities, because, it, might be more logical right I'll leave that up to you that's, one of the things that driving price and we did have a pretty significant, break out above two dollars and 70 cents now if one thing to notice is well on this chart and, that's one of the reasons why I wanted to zoom in on this is there's. Also a technical, kind of point of view you know technicians. People who are using technical analysis, you know if they're not very good at understanding market. Fundamentals. Here like. You, know, weather. Patterns, or whatever distribution. And supply they'll. Actually take, a look at the technical analysis, and assume, that price. Discounts. All that stuff right and so they'll focus on the price, but. Notice what sort of happened, here over, the last couple. Of months on natural. Gas for. Those of you who are technicians, you, might recognize, this, sort, of looks like an inverted Head & Shoulders, pattern that's. Happened here with, the neckline, being at around 270. And the. Breakout, that we just had for. A technician that, might be confirmation. Of the breakout of that little head and shoulders pattern there now.
For The technicians, that use this they. Might make an assumption here that over the next few months and this is an aggressive assumption. But, they might decide to think over the next few months that natural gas might be due to, go the distance from the neckline to, this to. The bottom of the head there which, you know roughly speaking on natural gas is going to be about 60 cents so, they might assume natural, gas at some point could trade up closer to about three dollars and 30 cents just based on this pattern over time is it are you with me on this so. There's a fundamental backdrop. That might be a little bit different than maybe what you're used to but. The. Technicals. Certainly, you know some technicians will just say it carries, across when, you're trading these commodities, products it's, you, know absolutely the same thing but, these, are some of the things that an investor, could go through to help them create an assumption based, on what we're looking at here some of these assumptions, might be steering toward, the, bullish, side right, worried, about you. Know cold weather you know cold snaps coming through the country I can, do that also. The fund or excuse me the technical, pattern one, thing that I've demonstrated to. This group a number of times but. This is something that, some. Other traders will use just this time of year, what. Type of seasonality. Do we usually have with. Natural. Gas in other words are there cycles, where there seems to be more demand or less demand, just. Based on you, know could, be weather-related. Items or production. Related items at the the, you. Know well heads but. Here's what you can do if you wanted to see kind of the seasonal, aspect what. Normally, happens this, time of year, you. Can on the chart go. To the, style, right, up here at the top of the page just click chart, style, and what. You can do is hit the chart, mode then. Under chart mode in the menu, there's something called seasonality, what. You can do is sort of click on that and that will give you a sense for and this is based on the last five, years worth. Of activity, the. Red line shows you kind of the average price over. The last five years so from a seasonal point of view what's it been doing. Right. And the Green Line is what the price has been doing this year and one, thing to note and you, know it could change right, there's no guarantee, that the seasonality, is going to hold through but. This time of year you know fall moving, into winter time. Has. Tended. To be kind of a bullish, season, for, these natural. Gas. Products. So, anyhow different. Methods, that traders can actually use to create, an assumption, might be a little bit different than, what you're used to but. You know practice, using, these products you've got seasonality. You, can keep your eye on inventories. You. Know II iead they will produc produce natural, gas inventory. Reports, today actually is their weekly report, and shame, on me I didn't actually see that natural gas weekly, report today in, terms of the supply and demand dynamics.
They, Keep track of how, much is basically. Sitting in tanks, and has. There been a draw, on that, right there you, know in other words a supply, dropping. Faster, than they expected, or is it going up more, than they expected, and then traders can use that as a fundamental dynamic or are, you just a Chartist right you like to use the charts but, there's multiple ways that, someone could view, these products all right but it kind of looks bullish right, longer, the short of all that talkin that I just did you, know a lot of these things do add up to, kind of look bullish, in natural, gas so. Let. Me go back to the chart mode and I'm gonna go back to the standard mode here just to get back to those candlesticks, right. Now if somebody wanted, to maybe. You. Know defer, the. Leverage involved, with buying the underlying future, they, could create. Something, related. To a futures. Option. Okay, and kind, of pick and choose their leverage, using. The options market rather, than just the underlying future, contract, if they wanted to mellow that out a little bit and, let's just say you know just for kicks and giggles that. That trader thought that you know natural, gas could probably get up to 290 and. Maybe, even go up further, over the next couple of months you know so just following through with the assumption, here you. Know a trader might decide to use some sort of a bullish option trade and if. We're thinking hey this could take time for, this trade to play out okay especially looking, at that Head and Shoulders pattern the. Head & Shoulders pattern took, you know a few months to actually create, and so, you, know if you're using those most traders will think okay probably. Take a few, months anyway for this thing to actually play out it. Might make sense if you're gonna use options, to kind of line up with those timeframes which. Would steer the individual, to, may be using January. Or February, contracts. What. We'll use here is the, January. Contracts, will go out fifty days now. One thing that does. Look a little bit funny here you've got two different choices you've. Got a financial, future versus. A physical, future, just. So you know that's based, on the way the, option, settles, right, you're familiar with regular, stock options, right. If a stock option that is in the money on expiration. It. Gets automatically. Exercised. Right so if it's in the money gets exercised, what, does that turn, into that's, the settlement, on a stock option if you sell a put and that gets. Exercised. That. Means it turns into or it gets assigned that, means it turns into 100, shares of stock right, seller has to buy a hundred shares of stock so it, settles in the underlying, stock what. This physical, and financial is. - is what. These options settle, into if they were assigned. Right. So, the financial means that, that settles in cash right, there's going to be a cash difference, between. The strike prices you choose and the. And. The, settlement. Price of the underlying natural, gas future and if, their physical, settled what, that means is that you. Know natural, gas futures, is, what. You get on the assignment, or the exercise right so one settles in cash it's, going to be a cash difference, that's the financial the, physical, actually, settles into, the underlying future, right so an exercised, option, there would. Turn into on, the physical would turn into a natural, gas future, product, right, and that these physicals, have. Been around forever right, well not forever but for a long time the, financials, are relatively new they've been around for about three or four years now but. What, you'll see here is that either one of these they. Do have, a tendency to carry a fair, amount of liquidity, just. Opening, up the financials, here. That. Might be too many options to have on the screen so I'm just going to narrow down my list of strikes so it's a little bit easier to view this but. You. Know natural gas has had a pretty big move higher so, we're kind of into some strike prices, that, you. Know previously. Haven't been in play but with that move and natural gas, now, they're kind of newly in play here but, you do, see, a fair, amount of open interest building, in a lot of these contracts, and that's one thing to double check before you trade options on futures is, make.
Sure That there's lots of participation, just, hopefully, to avoid a liquidity, trap Hotel. California you can get in anytime you want but it makes it really hard to leave because. You've got wide bid to, ask spreads, right, the more open interest tends. To mean the better the, easier it is to get in and out but, that's going to be the financial settled, that's kind of the look at the open. Interest there the, physical, settled as well has quite, a bit of open, interest there in fact the physical I would say it's a little bit more evenly distributed, maybe. Not absolutely. Much open. Interest but anyhow either one of these are, fairly. Liquid underlying. Options, I am going to go over to the. Financials. Here just, for our trade example. Because. You know if a trader we're thinking hey, we could get up to 290 or, higher that trader. Might decide just as one example they. Might to decide to either a maybe, buy a call, option right. That's one choice market. Goes up calls. Can appreciate in value okay. But if we hit confirm and send on buying that call you. Might see that when you look at the price of this call and I just clicked on the 285. Call, strike here let's click the ask price is. If this were a purchase, the. Price, here says it's twenty four and a half cents, might be thinking I twenty four and half cents that's no big deal it's like twenty four bucks right no. It's, actually not because. Whenever, you're looking at the price of these things you, got to multiply. That. Price. By. The remember, our friend, multiplier. We. Looked at that on the fundamentals, page the. Multiplier, when, you're dealing with natural gas futures is, ten. Thousand, so. On stocks it's usually one hundred on this, natural gas future, its twenty, four and a half cents, times ten, thousand, so, the cost of one of those options is actually twenty, four hundred dollars. To. Buy one of those okay. So. That's you know hey it is what it is right, but some traders might look at that and say you know that's, a lot and so, is there a way to maybe turning this into a spread, where I can actually reduce, that total, investment, and possibly, bring down the, risk, or the exposure, I have to this what, they could actually do is you know if they were gonna buy a call they. Could sell, a call at, a higher set of strikes you. Know let's just say we went to the, you. Know again thinking back on that chart if the trader we're thinking hey we could go up to 290, that's, actually a pretty big move in natural gas right, but, let's say they, felt like we could go to 290, or higher they, could sell the, 290, call I'm going to hold the control key down on the keyboard and click the bed. At 290, call and. Notice. What just happened to the debit there right. So turning. That into a spread and this would be a bold call spread you. Know reduces. The price of this huge. From, you know twenty four and a half cents, to, basically two, cents let me go and lock that in so, what is that two cents actually, mean in terms of real dollars, well. That's actually. $200, max loss now so, basically you're taking one, tenth of the. You. Know expense, to get involved in that trade but there's a trade off here right it's no longer just a straight long call this. Is gain limited, now the most, that, this could make is the difference, between those, two strikes. -. The debit, which, in this case would be $300. However. Right, if we compare the Max profit to the max loss you. Know if that move were made this still could result in you. Know a, one. Hundred and fifty percent return if. Natural-gas, makes, that move not including, you know the Commission's, or the fees involved that. Will, just call it transaction, costs, involved. To put on that trade but you could see all the break down here now, one thing about this as well that could be something. That is uniquely, surprising. To, individuals. Who are just starting with futures you. Might look at this and say okay that's a debit spread I get it Mike stop you know tap, dancing through the tulips, it's a debit spread I understand, what those are so, that means I would need to come up with $200. Per. Spread, in order to buy that well, actually no see that's the risk is $200. The investment, but, because these futures, get. Regulated. A little bit differently. Oftentimes. What, you'll see is that the buying power the. Cost to do a debit spread like this is actually less than what you might think so. Remember. That the name of the class leveraging, capital. With futures well. This is another example of that so, rather than having to put up $200. Initially, to get in there's. Only ninety two dollars initial. Buying, power to get into, that trade so. They're, cutting down you. Know the here basically. By 50%, now. Note this though that does, not mean that the trade could only lose 92 dollars it, could still lose $200.
So Be careful, I've. Seen traders, and I've been a party. To this as well where you, know maybe you take a position that's a little bit too big because. You're placing that position based on the effects of the buying power and you're not thinking about the max loss but. You you, know traders can efficiently, use their. Capital, right, by having to put up less margin. To, get a trade that actually, has a much greater max. Loss or a much, greater investment, if you're used to trading different products let's, say we decided, to put that trade in there. You. Know and if, we want to even get creative, here right. Noting, and now this would actually be an addition to make this trade more bullish, right, but if someone wanted to get creative and they thought well maybe. Natural, guest doesn't go all the way up to 290 it. Is kind of nice to where if it goes up to 290 there, is that profit, of $300, but. Knowing that it is kind, of a smaller position right let's say it's in their wheelhouse they. Could actually maybe, you know so on the call side do something like this that could enhance the, returns, if the big move it. You know takes place but. Also maybe, go over to the put side of the market, and. Maybe. Do a high probability put. Spread alongside of this and, use. A high probability maybe, out of the money bull put spread is, a way to generate some credits, that, could help kind, of you, know cover the costs, doesn't, mean the risk is going down but cover the expenses, in buying, this debit spread and, just let's. See what that might see, see how that might work I'm. Gonna need a few more strike prices here and. You know what let's just take this over to the analyze tab it'll. Be easier on the analyse tab and dealing with it there. Okay. So this is the what they call the bowl call spread, on the analyze tab kind, of looks like a Z there and. You can see the. Max loss to the max gain but, what if somebody wanted to combine this with a new simulated, trade. Let. Me just go back to the actually, we can stay on that one right there. See. If we can find maybe something, out of the money let's do look at a bull put spread maybe, out of the money at around 30 deltas high, probability, and add that to this and see what we come up with so, I'm going to analyze sell a vertical. And. That'll queue up at the bottom of the page and it'll add that kind of right alongside of, the, long call vertical but. If the traders sold you know now notice these vertical, spreads these put spreads they're, going for point, zero one two right. If we sold two of those point. Zero one two s that. Could potentially generate, enough credit, let me go ahead and hit confirm and send on that there we go, that could potentially generate enough, credit to actually, you, know sort of cover the cost of buying that call spread now, be, aware there's, going to be risk if we sell two of these bull put spreads but. You can see here that two of those bull put spread is being sold would carry, the risk of, three. Hundred and sixty bucks buying, power would only be a hundred twenty six dollars but. That would actually generate a credit here two hundred forty bucks and that credit is actually greater than the cost to buy these two call spreads and, if you put those two things into. A blender. You wind, up with something like this and now. Let. Me go ahead and set slices, to our break-even point. On. And. Make, sure the date is the same. Yeah. That's going to be the. 1227. Expiration. I believe. Yeah. It is so anyhow, what, we've got now is a trade that really. In order to at least make something, not including, commissions we, just need you, know natural gas to stay above two sixty two and, right now it's at what two seventy-five or whatever, it is but, trying, to see the scale on these numbers is kind of hard maybe it's easier if I go that way there. We go but two sixty, to eighty is the break-even point now for this trade the, actual natural gas future, itself the price of it is up here, right, and notice. There. Is a, high. Probability right. Now you. Know the market could actually go down and still, this could have some degree of profit, we, do have this bowl put spread over here that can cause this risk if the market goes down too far but, if we go up a lot right, still get the benefits, of that long call spread over, here right so this is just one way just kind of combining, trades by the way if you want to know the name of this this, is called a kind. Of risk reversal is, what it is I don't know if you've ever heard of that but it's selling you, know basically this puts bread to, buy a call, spread. And, it's, just one way to kind of use some of those option, techniques, to, kind of create what, you want and I'll tell you what let's go ahead and put in that, risk reversal. Here, and we'll, have that as an illustrative, trade now, this, is a fairly small position.
Usually, We can go a little bit greater, risk. Than this so, I'm going to change my quantity, to. Two to four we'll, go ahead and sell for put spreads and buy two call, spreads and, just, the total risk now is going to be about $1000, would be, $1100, not including commissions just, gonna like, move my pointer over to this max loss space and take a look at the max loss right there it's a nice little shortcut, I'm, so $1,100. I. And. That's just, closer than to the size of the positions, that we usually trade in this account so anyhow I'm gonna go ahead and hit confirm and send will. Buy the call spread, there is a little bit of leg risk in this by the way, and. Confirm. And send on the put spread as well. Okay. So that's actually filled, and there, we've got just in natural gas been a long time since we've done anything with, natural, gas. My. Screens, are just doing some weird things right now sorry if the clicking looks strange it's because they're, just not reacting, to my clicks the, screen is not reacting, to my clicks the way I thought they would but, now we got a natural gas trade, that. We can certainly track, in. Upcoming. Classes I'm going to move that actually, over, to our group on futures, and that way it's just kind of easier to keep track of okay, so the, last thing I wanted to talk about today, just. Kind of moving on is is. MDS, future, this, is a micro emini future, we place that in this paper account, to sort of act as a hedge this. Hedge is getting clobbered because, the market is going up it's a bullish account and this is a bearish trade, but. There is you, know in, managing, losing, hedge positions, it's kind of a difficult thing to do I don't, want to get rid of this hedge right, just a decision I'm making here I don't want to exit this hedge but. We do have an order to buy out of this hedge for, a profit, if the market, goes down we've. Got this scaled in there got in order to buy in at three thousand, twenty, nine hundred and twenty nine fifty. Now. Just a thought here and. We'll. Bring up the. Mes. On a chart but, with the market kind of breaking, out to the upside the. Way it has you. Know maybe we don't keep our buy orders on that hedge all, the way down here as, far as these support, floors down at 2900, let's, just go ahead and make an adjustment and. We'll, just go ahead and buy into this entire hedge if the market does come down to 3,000 and just here's the logic right and I'm not saying that this is right for everybody, I certainly. If you're gonna be a hedge or you've got to figure out what your plan is for exiting these hedges the, hedges are losing money right now but. What I'm going to do is identify you. Know basically a level, where if the market did pull back and my head just started working again, where, would be a place that I'd like to get more bullish again and quite. Possibly that, could be around 3,000, where we broke out to the upside so. What I'm going to do is place an order to buy back. All of those futures, at 3,000. So, if the market does come down and the hedges are starting to work they're starting to make their money back and we're losing money on the rest of the portfolio I'm, just looking for a location.
Here That we wouldn't mind buying into the hedge so, clear, those off the books and now we're back and more bullish again does that make sense and in this case I'm just gonna use that level of 3,000, so, all we'll do is just make an adjustment, and, I'll do that on right. Here just back to the monitor page make. An adjustment, cancel. And replace these orders, then, move the other two back to 3,000. To understand the whole story. Behind. What. You're gonna want to do is just listen to some of the previous sessions, where we talked about hedging but anyhow. That's what I'm doing is just make it making adjustments, to these open orders and, we'll just move them all cancel. And replace up, to the 3,000, handle. Some. Traders might decide to if they're bullish enough they might decide to just eliminate the hedge but. I'm. Not going to all. Right anyhow we, just moved up those limit, orders on those hedges all, right so thanks everybody I'm out of time I don't know where the time goes here. I've. Already been at this for an hour so let me just go ahead and shut this down what, we've talked about today we. Just followed up on that trade we placed yesterday, yesterday's, example, but. Really we wanted to get into natural gas and spotlight, that product, and so we do have an risk. Reversal reversal, in, the options market and also. Just a quick adjustment, there on our, micro, hedges. So hopefully you were able to learn something today and I. Do appreciate your attendance I would say practice this information, that we talked about today you know just experiment, with it in a paper money account and also, maybe take a look at John McNichol, he does a class of trading. Futures every, Monday, which, is a nice complement where he goes through lots of examples, especially with technical, analysis, and you. Might want to check that out that's every Monday morning just right, when the stock market opens, at 7:30 a.m., right. Like. And subscribe to the channel it's, just a great way to keep track of all, the webcasts, that are getting updated, I'm. So like and subscribe, also. Remember, Twitter you can feel free to follow the coaches on the Twitter handle and here. Are your final, disclosures. Thanks. Everybody have a terrific day stick around technically. Speaking we'll be coming right up we'll give it about a half an hour ok bye, everybody have a terrific day. You.
2019-11-12 12:32
